Earlier this week when we noted that Hurricane Harvey was likely to have destroyed more cars than Katrina (see post here), we concluded by predicting that auto OEMs would spin the utter devastation in Houston as a 'positive' for their inventory crisis. Here's what we said:
"Of course, when the auto OEMs report abysmal sales this Friday they will undoubtedly also tell you how Hurricane Harvey is great for long-term sales because of all the salvaged cars that have to be replaced."
Now, fast forward just a couple of days and it's almost as if Ford prepped their August sales call notes from our previous post. Speaking to analysts this morning, Ford's CEO gleefully touted all of the upside potential for the auto industry in the wake of Hurricane Harvey noting that replacement demand will be "a little more positive" than even he expected.
We think that the effect of the backfill of demand from Harvey, while we believe we can do that, but trend that a little more positive there as there's going to be replacement demand in the secondary used market.
In terms of our overall impact in the month of August, from a new vehicle or fleet basis from Harvey and possible to say at this point we know it had some impact, which I think is further accretive. So we actually we had a pretty good August numbers, because there had to be some impact. We know as a percent of our internal targets of Houston used in the region which was far and away our weakest performance, if you would expect.
Of course, it's somewhat difficult to understand exactly how an increase in salvage rates is supposed to solve your bloated inventory problem if you simply turn around and promise higher production...but maybe Ford is just better at math than we are.
Great question, we can't accurately predict the production ramifications as we don't really have an assessment yet of, both the existing vehicle car park and our dealer – and a real accurate assessment in our dealer inventory. There will be every indication at this point that we would have to add some production in the backfill process for getting inventory backfill and meeting customer replacement demand.
Finally, just to clarify exactly how positive Hurricane Harvey is for Ford, they estimate that roughly 200,000 - 1,000,000 cars were destroyed in Texas as a result of recent flooding. Moreover, Ford's market share is 33% higher in Houston than the rest of the country...which means they should disproportionately benefit from the surge in replacement demand that will inevitably come over the next couple of months, right?
Ironically, despite having perhaps the largest dealer presence of anyone in Houston, Ford notes that they only lost a couple thousand cars because they planned in advance and moved their dealer inventory to higher ground. Presumably Ford is implying that GM and Toyota simply weren't smart enough to do that?
First of all, the Houston, Houston is the fourth biggest market in the U.S. and it's an incredibly important overall vehicle market and one that the Ford Motor Company and the Ford brand is very strong in. We have about 33% higher market share in Houston market than we do nationally. A lot of that is due to – as you say, because of a very rich truck mix, both light duty and super duty in that market. So, our recovery effort obviously is going to be very focused with the dealers on backfill and inventory making used vehicles accessible to them because the damage to both the existing car park and the inventory would affect used as well as new and, you know, we will be working along those lines.
We do believe that total losses in our dealer inventory are less than we initially feared, either because of pure luck or dealers making an effort to get the higher ground and advance to the store. And so, we think it's in the low 1000s, but it's impossible to accurately determine the number right now. But [indiscernible] we believe is lower than what we thought we have, on the existing car park I assume anywhere from 200,000 to a 1 million, I think it's impossible to ascertain at this point.
In any event, auto sales for the month of August were predictably chaotic with Hurricane Harvey cutting out several selling days in one of the biggest markets in the country. Ford and GM managed to 'beat' wall street estimates while everyone else missed. That said, August sales numbers will likely be completely dismissed by investors.
And, even though it will be dismissed as noise, GM forecasts that the August monthly SAAR came in at 16.4 million, which nearly breached the lower bound of Ford's plateau.
Meanwhile, GM boasted about 'solving' their inventory problem, with days of supply declining to 88 days from 104 days last month, while downplaying that fact that their incentive spending surged 21% MoM from 11.5% in July to 13.9% in August.
Finally, as always, all news is good news!